A Top Dividend Stock in Tech Just Got Better

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Software giant Microsoft (NASDAQ: MSFT) increased its dividend this week, as expected. The increase marks the 14th year in a row Microsoft has increased its dividend, and it reflects the company's recent record free cash flow levels. 

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Further, Tuesday's dividend increase makes an already enticing dividend stock even better. Here's a closer look at Microsoft's dividend increase and why it's a good reminder of how enticing the software company is as a dividend stock.

Microsoft's dividend increase

Microsoft increased its quarterly dividend by 7.6% compared to the previous quarter's dividend. The new dividend is payable on Dec. 14, 2017. But investors will need to own the stock before the ex-dividend date on Nov. 15 in order to get paid the dividend.

The 7.6% increase is about in line with Microsoft's increase last year when the company increased its dividend by 8%. 

A solid dividend stock

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Microsoft's meaningful 7.6% dividend increase this week reinforces the stock's quality as an income investment. Not only can Microsoft easily afford the dividend, but Microsoft's growing free cash flow recently makes a case for more dividend growth ahead.

Microsoft's trailing-12-month free cash flow is $31.4 billion, up about 26% year over year, making a dividend increase both easy and a no-brainer. Of Microsoft's record $31.4 billion of free cash flow in the trailing 12 months -- Microsoft's fiscal 2017 -- the software company paid out just $11.8 billion of its free cash flow, or about 38%. This compares with Microsoft paying out 44% of its free cash flow in dividends during fiscal 2016, and 43% of its free cash flow during fiscal 2015. Paying out a smaller percentage of free cash flow recently makes a good case for sustained dividend growth in the coming years.

Microsoft also shines when it comes to its dividend yield. The company's 2.1% dividend yield is higher than the average 2% yield of stocks in the S&P 500.

Further, Microsoft stacks up nicely against some of tech's best dividend stocks: Apple (NASDAQ: AAPL) and Intel (NASDAQ: INTC).

Company

Dividend Yield

Dividends Paid as a Percentage of TTM FCF*

Microsoft

2.1%

38%

Apple

1.6%

25%

Intel

3%

43%

Apple, for instance, may pay out only 25% of its free cash flow in dividends, but Microsoft dividend investors get a much meatier dividend yield of 2.1%. Apple's dividend yield is just 1.6%.

Compared to Intel, Microsoft's 2.1% dividend yield is well below the chipmaker's yield of 3%, but Microsoft has more room for dividend increases. Microsoft is paying out just 38% of free cash flow in dividends, while Intel's dividend payments as a percentage of free cash flow are 43%.

Microsoft was already a good bet for income investors -- and the company's dividend increase this week reinforces why: Microsoft looks well positioned to pay out a meaningful, growing dividend for years to come.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.